Startup mentors discuss strategies and challenges of creating a new business.

Steve Case: Helping the ‘Rise of the Rest’ Cities

GUEST MENTOR Steve Case, chairman and CEO of Revolution and co-founder of AOL: Consider this scenario: I’m an entrepreneur with a promising concept for a business. I need to raise capital so that I can hire a team, develop my product and buy some equipment. What are my options?

Banks won’t give me a loan because I have no revenue and no collateral. Venture capital firms consider my company “too early” to back. Friends and family may be willing to help – if they have cash to spare. But they have to be millionaires under federal law to be “accredited investors” – and I can’t appeal to the public at large for help.

If the prohibition on smaller investors and public solicitation backing startups sounds unfair, undemocratic and outdated, that’s because it is. It grew out of a law President Franklin Roosevelt signed 80 years ago, long before the Internet gave all of us new tools to learn about investment opportunities. Times have changed – but our laws didn’t.

In 2012, Congress passed legislation to change these antiquated rules. The Jumpstart our Business Startups (JOBS) Act contained a number of provisions to help entrepreneurs and small businesses raise capital, including a requirement that the SEC adopt rules legalizing equity crowdfunding for non-accredited investors.

Twenty months later, following an arduous and thorough rule-writing process by the SEC, equity crowdfunding is poised to begin. That’s a major win for America’s entrepreneurial sector – the source of all the net-job creation in America over the last three decades and the key driver of innovation in our economy.

Under the new rules, startups will be permitted to raise up to $1 million from non-accredited (i.e. individuals with less than a $1 million net income) investors. To protect these investors, the law stipulates that the maximum investment allowed is $2,000 or 5% of an investor’s annual income.

The vast majority of American towns and cities are underserved by banks and venture capital and thus need these non-accredited investors. For decades, Silicon Valley has dominated the startup scene, accounting for almost half of all the venture dollars invested in young companies over the last 10 years. This has left a void for entrepreneurs elsewhere. It’s in these places – what I call “Rise of the Rest” cities – where crowdfunding will give promising startups access to capital and attention of a wider audience of angel investors.

To be clear, not everyone will gain from crowdfunding. Investing in startups is a risky endeavor. Most will fail or never fully realize their promise. But that is hardly justification for limiting the pool of investors to the wealthiest among us, or telling ordinary Americans that they cannot go online and invest in an entrepreneur or idea they believe in.

Entrepreneurs who use crowdfunding will have to step up their game. Beyond fundraising, the inherently social nature of crowdfunding makes it an effective free marketing tool. Its capacity to generate buzz and build brand identity with a motivated and influential set of consumers is unmatched by traditional advertising methods. And the opportunity to simultaneously attack two of the largest challenges startups face – attracting capital and building a brand – in a mutually reinforcing way is a powerful concept that will play an important role in the startup playbook going forward.

At its core, crowdfunding empowers people – whether it’s the entrepreneur with an idea he or she thinks is going to be the next big thing, or an investor with an appetite for risk and desire to get off the sidelines. It’s not a panacea; it won’t magically fix all that ails our economy or change the fundamental dynamics of what it takes to start and scale a successful business. But it will gradually even the playing field for the innovators and risk-takers who power our economy and make our future bright.

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For aspiring or actual entrepreneurs, The Accelerators forum is a lively discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. To reach us: @wsjstartup or theaccelerators@wsj.com.